Management s Discussion & Analysis Period Ended March 31, 2004 as compared to March 31, 2003

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1 SUITE 700, 505 THIRD STREET S.W., CALGARY, ALBERTA T2P 3E6 FACSIMILE (403) TELEPHONE (403) Management s Discussion & Analysis March 31, 2004 as compared to March 31, 2003 This Management Discussion and Analysis should be read in conjunction with Terra Energy Corp. s (the Corporation ) unaudited financial statements and corresponding notes for the periods ended March 31, 2004 and March 31, This commentary is based on information available at May 14, Additional information relating to Terra is available on SEDAR at For the purposes of calculating unit costs, natural gas has been converted to a barrel of oil equivalent ( BOE ) using six thousand cubic feet equal to one barrel of oil unless otherwise stated. This conversion conforms to Canadian Securities Regulators National Instrument Standards of Disclosure for Oil and Gas Activities. BOE s are a very approximate comparative measure that, in some cases, could mislead particularly if used in isolation. Management s Discussion and Analysis contains the term cash flow from operations and funds from operations, which should not be considered alternative to, or more meaningful than cash flows from operating activities as determined in accordance with Canadian generally accepted accounting principals ( GAAP ) as an indicator of Terra s performance. Terra s determination of cash flow from operating activities may not be comparable to that reported by other companies. The reconciliation between net earnings and cash flows from operating activities can be found in the statements of cash flows from the unaudited financial statements. Corporate History Terra Energy Corp. ( Terra ) is a publicly traded corporation incorporated under the Business Corporations Act of Alberta formed as a result of the amalgamation of Terra Energy Corp., Terrapet Energy Corp., and Rhodes Resources Corp. This Management Discussion and Analysis along with the associated financial statements referenced above include the accounts of the Corporation and its wholly-owned subsidiary Constar Resources Ltd. and Terra Energy, a general partnership between Terra Energy Corp. and Constar Resources Ltd. The comparative information is for Terrapet Energy Corp. The Corporation s principal business is exploration, development and of petroleum and natural gas properties in Western Canada.

2 Current Production Average daily for the three month period ended March 31 in barrel equivalents of oil is as follows: Oil Natural Liquids Total Gas March 31, ,033 March 31, Increased is due to continued developments and acquisitions. Results of Operations Revenues, net of royalties Production Other Net Income March 31, 2004 $2,914,190 $736,260 $1,630,190 $547,740 March 31, 2003 $2,193,934 $679,259 $1,085,239 $429,436 The Corporation earned higher revenues as a result of increased activity. Increased revenues in 2004 were also due to improved commodity prices as compared to Production expenses per BOE were as follows: Production BOE total Production per BOE March 31, 2004 $736,260 94,003 $7.83 March 31, 2003 $679,259 78,146 $8.69 Net revenues per BOE were as follows: Revenues, net of royalties and expenses BOE total Net Revenues per BOE March 31, 2004 $2,177,930 94,003 $23.17 March 31, 2003 $1,514,675 78,146 $19.38 Higher net revenues for the period ending March 31, 2004 are due to improved commodity prices and improved operating efficiencies.

3 General and Administrative General & Administrative BOE total Expense per BOE March 31, 2004 $528,419 94,003 $5.62 March 31, 2003 $287,773 78,146 $3.68 The increased General and Administrative expenses reflects Terra s increased legal, accounting, and engineering costs related to the amalgamation. These costs were one-time and will not be repeated in future periods. Increased general and administrative costs are also due to additional technical personnel costs required to manage forward the Corporation s anticipated growth in volumes and increased exploration and development activity. Depletion, Amortization, & Accretion Depletion, Amortization, and Accretion BOE total Expense per BOE March 31, 2004 $693,000 94,003 $7.37 March 31, 2003 $523,581 78,146 $6.70 Increased depletion, amortization, and accretion expenses are attributable in part to the early adoption of National Instrument which has refocused reserve classification categories and resulted in lower reserves being classified as proven and an increase in the probable classification. Management performed and the external auditors reviewed a ceiling test calculation to assess the recoverability of its petroleum and natural gas assets as at December 31, The calculation supported the Corporation s carrying value. Financial Condition Current Current Liabilities Oil and gas properties Assets March 31, 2004 $2,971,114 $9,308,535 $15,796,949 December 31, 2003 $3,385,428 $10,570,606 $12,224,115 The decrease in current assets is due mainly to the elimination of a $559,726 promissory note by a dividend declared on January 29, The decrease in the line of credit and regular payments of accounts payable resulted in lower current liabilities. When the Revolving line of credit is excluded from current liabilities, the Corporation had a working capital surplus of $393,328 at March 31, 2004 compared to surplus of $381,968 at December 31, Capitalized resource properties as at March 31, 2004 are $15,796,949 net of depletion, compared with $12,224,115 as at December 31, Oil and gas properties increased as a result of continued acquisitions, such as the amalgamation with Rhodes Resources Corp, as well as continued development of existing properties.

4 Liquidity and Capital Resources The Corporation s share capital is as follows: Common Shares Date Shares Dollar Value Outstanding March 31, ,523,000 $8,174,852 December 31, ,500,000 $1 During the period ended March 31, 2004, as part of the amalgamation with Terra Energy Corp. and Rhodes Resources Corp., the 22.5 million common shares of Terrapet Energy Corp. were exchanged for 18,547,304 common shares of Terra Energy Corp. 3,429,752 preferred shares from Terrapet Energy Corp. were converted to 3,429,752 common shares. 5,345,944 common shares were issued to the former shareholders of Rhodes Resources Corp. An additional 200,000 common shares were issued as part of the purchase of certain oil and gas properties. Preferred Shares at March 31, 2004 Series Shares Dollar Value Outstanding Series I to V 1,148,641 $1,148,641 Series VI nil nil Preferred Shares at December 31, 2003 Series Shares Dollar Value Outstanding Series I to V 1,148,641 $1,148,641 Series VI 3,429,752 $3,429,752 During the period ended March 31, 2004, the Series VI preferred shares were converted to common shares as part of the amalgamation between Terra Energy Corp., Terrapet Energy Corp., and Rhodes Resources Corp. For the period ended March 31, 2004, the Corporation has generated cash flows from operations of $1,494,740 ($662,264 for the period ended March 31, 2003). Off-Balance Sheet Arrangements The Corporation has entered into various fixed-price physical natural gas contracts with delivery for 2004 of 321,000 GJ at prices between $5.80 and $5.87 per GJ. The Corporation has agreed for 2004 to purchase 214,000 GJ natural gas at a price of $5.55 per GJ. The Corporation has entered into various fixed-price physical oil contracts with delivery for 2004 of 26,730 barrels at prices between $33.38 and $36.89 per barrel. The Corporation has entered into various fixed-price financial oil contracts with delivery for 2005 of 73,000 barrels at prices between $35.35 and per barrel.

5 The purpose of these contracts is ensure a minimum cash flow level for continued operations. The amount that the Corporation would be required to pay if all the contracts were cancelled at March 31, 2004 would approximate $268,000 (March 31, $1,268,000). Transactions with Related Parties During the period January 1 through to March 31 of each 2003 and 2004, Terrapet and/or the Corporation entered into the following related party transactions: (a) Related Parties: Capital Strategies Canada Corp., controlled by officers of the Corporation Rhodes Resources Corp., related due to common ownership Terra Capital Corp., parent company Forterra Properties Inc., related due to common control Rhodes Petroleum Corp., related due to common control (b) Transactions: March 31, 2004 March 31, 2003 Interest revenue Rhodes Resources Inc. $ - $ 11,454 Management fee Terra Capital Corp. 327, ,808 (i) (ii) Revenue and expense transactions are in the normal course of operations and have been valued in the consolidated financial statements at the exchange amount which is the amount of consideration established and agreed to by the related parties. Management fees have been paid to Terra Capital Corp in respect of management, personnel service, vehicle, office furniture, and equipment leasing for the periods ending March 31, 2003 and (iii) During 2003, the Corporation purchased all the outstanding shares of Rhodes Resources Inc., a corporation under common control with Terrapet. The assets consisted of oil and gas properties with a net book value of $100,000. A note payable for $100,000 was issued by Terrapet to Rhodes Petroleum Corp for consideration of this transaction. Rhodes Resources Inc. was immediately wound up into Terrapet. (iv) Prior to the amalgamation with Rhodes Resources Corp., and Terra Energy Corp., Terrapet paid a dividend of $770,816 to Terra Capital Corp. The dividend resulted in the elimination of a promissory note receivable at December 31, (c) Due from (to) related parties March 31, 2004 December 31, 2003 Terra Capital Corp. $ (46,150) $ 538,567

6 Included in accounts payable and accrued liabilities at December 31, 2003 are $39,456 owing to Rhodes Resources Corp. This amount is due for the working interest share of expenses related to wells operated by the Corporation. Included in accounts receivable at December 31, 2003 is $228,497 due from Rhodes Resources Corp. to Terrapet in connection with a farm-in arrangement between the two companies. As a result of the amalgamation with Rhodes Resources Corp., no amount is owed or owing at March 31, Critical Accounting Estimates In preparing financial statements in accordance with generally accepted accounting principles, management undertakes certain judgments and estimates. Changes in these judgments and estimates could have a material impact on the financial results and condition. The following discussion outlines accounting policies and practices that are critical to determining the Corporation s financial results. Reserves are critical to several accounting estimates, affecting net income through depletion and the ceiling test calculation. Estimating reserves is very complex, requiring many judgments based on available geological, geophysical, engineering, and economic data. Estimated reserves also utilized by the Corporation s bank in determining credit facilities. Changes in these judgments could have a material impact on the estimated reserves, and subsequently the Corporation s financial results and financial condition. Ceiling Test Under the Canadian Institute of Chartered Accountants (CICA) full cost accounting guidelines, the Company calculates a ceiling test annually whereby the carrying value of petroleum and natural gas properties is compared to estimated future cash flow from the of proved reserves. The Corporation has early adopted the requirement of CICA Accounting Guideline 16 Oil and Gas Accounting - Full Cost ( AcG 16"). The requirements of the guideline were to be followed for all fiscal years beginning on or after January 1, 2004 but early adoption were encouraged. At December 31, 2003 the Corporation calculated the ceiling test using AcG 16 without any material adverse impact on the Corporation s financial position or results of operations. Asset Retirement Obligation The Corporation early adopted the CICA Handbook Section 3110 Asset Retirement Obligations. The section requires accrued reclamation and abandonment obligations be recognized on the balance sheet by increasing oil and gas properties offset by a liability of an equal amount. Estimates are required to determine the future obligation. The asset and liability are initially measured at fair value, being the discounted future value of the liability, and then capitalized as part of the cost of the asset and subsequently amortized over the life of the asset. The liability then accretes until the retirement obligation is settled. Litigation The Corporation is involved in various claims and litigation arising from the normal course of business. While the outcome of these matters is uncertain and there can be no assurance that such

7 matters will be resolved in the Corporation s favor, the Corporation does not currently believe that the outcome of adverse decisions in any pending or threatened proceeding related to these and other matters or any amount which it may be required to pay by reason thereof would have a material adverse on its financial position or results of operations. Change in Accounting Policies In 2002 the Canadian Institute of Chartered Accountants ( CICA ) approved Section 3063, Impairment of Long-Lived Assets (S. 3063), establishing standards for the recognition, measurement, and disclosure of the impairment of long-lived assets, and applies to long-lived assets held for use. An impairment loss is recognized when the carrying value exceeds its fair value and is not recoverable. This standard is effective for fiscal years beginning on or after April 1, 2003 with early adoption being encouraged. Accounting Guideline 16, Oil and Gas Accounting Full Cost (AcG-16), issued in September, 2003 includes this section in the application of the impairment test for oil and gas companies using the full cost method of accounting. The carrying value for oil and gas properties is limited to their fair value, which is equal to estimated future cash flows from proved and probable reserves, calculated future price forecasts and costs discounted at the risk-free rate. AcG-16 is required for all fiscal years beginning on or after January 1, 2004 with early adoption being encouraged. Terra has early adopted the requirements of AcG-16 at December 31, There has been no material adverse impact on the Company s financial position or results of operations. For fiscal years commencing on or after July 1, 2003 the CICA s new accounting pronouncement Accounting Guideline 13 Hedging Relationships (AcG-13) is in effect. This guideline sets out certain conditions when hedge accounting may be applied; otherwise the fair values of derivative financial instruments are recorded as an asset or liability on the balance sheet. Terra does currently have hedges. The purpose of the hedges is to ensure a minimum level of cash flow. Terra has early adopted the CICA s section on Asset Retirement Obligations (S. 3110). The section is required to be adopted for fiscal years beginning on or after January 1, 2004 with early adoption being encouraged. S requires accrued reclamation and abandonment obligations be recognized on the balance sheet by increasing oil and gas properties offset by a liability of an equal amount. The asset and liability are initially measured at fair value, being the discounted future value of the liability, and then capitalized as part of the cost of the asset and subsequently amortized over the life of the asset. The liability then accretes until the retirement obligation is settled. Comparative amounts for 2003 have been restated with an immaterial impact on the results of operations. Financial Instruments The Corporation results are impacted by external market risks associated with fluctuations in commodity prices, operational and safety and environmental risks. The Corporation partially mitigates its exposure to market risks through the use of various financial instruments and physical contracts. The Corporation does not utilize derivative instruments for speculative purposes.

8 Business Acquisitions On November 25, 2003 Terrapet Energy Corp. purchased all the outstanding shares of Constar Resources Ltd. in exchange for the issuance of 929,752 Series VI preferred shares. The purchase has resulted in increased proven and probable reserves of approximately 231,000 barrels equivalent. On January 30, 2004 Terrapet amalgamated with Rhodes Resources Corp. ("Rhodes") and Terra Energy Corp. to form a new company Terra Energy Corp ("Terra"). The common shareholder of Terrapet Energy Corp. received 18,547,304 common shares of Terra, with the Series VI preferred shareholders of Terrapet receiving 3,429,752 common shares of Terra. The shareholders of Rhodes received 5,345,944 common shares of Terra. The share allocation has been based upon the relative valuations for oil and gas properties as determined by independent evidence adjusted for various other assets and liabilities. The purchase increased oil and gas properties by approximately $1.9 million. Oil and gas reserves have increased by approximately 271,000 barrels equivalent as compared to Terrapet s reserves. The amalgamation constitutes a reverse takeover as defined by Policy 5.2 of the TSX-V and is subject to Policy 5.9 of the TSX-V regarding related party transactions. The transaction will be recorded at the exchange value of the assets received from Rhodes as there is sufficient independent evidence available and there is a substantive change in the ownership interests. Outlook 2004 Terra Energy Corp s capital expenditure budget for 2004 is approximately $12.9 million comprised primarily of development and tie-in projects. Management anticipates that these projects will add an additional 1,000 BOE per day of by year-end. The capital expenditures will be funded by a combination of operating cash flow, bank financing, and capital issuance. In anticipation of increased future exploration opportunities, Terra will be adding to its technical staff, throughout the remainder of Terra continues to seek growth opportunities through increased and acquisition strategies. Terra s management expects to exit 2004 with 2,000 BOE per day of and be positioned to enter 2005 with a more aggressive exploration posture. Certain statements contained in the above Management s Discussion and Analysis, including, without limitation, statements containing the words believes, anticipates, estimates, expects, and words of similar import, constitute forward-looking statements. Forward looking statements are not guarantees of future performance and involve risks and uncertainties, which could cause actual results to differ materially from those anticipated in these forward-looking statements. Among the key factors that could cause such differences are: fluctuations in petroleum and natural gas prices, and/or changes in petroleum and natural gas reservoir performance. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by applicable securities law.